Judge: Daniel M. Crowley, Case: 22SMCV00237, Date: 2023-04-06 Tentative Ruling

Case Number: 22SMCV00237    Hearing Date: April 6, 2023    Dept: 207

Background

Plaintiff Bank of America, N.A. (“Plaintiff”) brings this action against Defendants Paul Guez and Elizabeth Strauss Guez (“Defendants”) to collect amounts alleged owed to Plaintiff pursuant to a credit agreement. Defendants now seek leave of Court to file a Cross-Complaint against Plaintiff to assert causes of action for breach of contract and conversion stemming from actions taken by Plaintiff’s predecessor-in-interest. Plaintiff opposes Defendants’ motion.

Legal Standard

Motions for leave to file a Cross-Complaint are governed by Code Civ. Proc. § 428.50, which provides:

(a)        A party shall file a cross-complaint against any of the parties who filed the complaint or cross-complaint against him or her before or at the same time as the answer to the complaint or cross-complaint.

(b)        Any other cross-complaint may be filed at any time before the court has set a date for trial.

(c)        A party shall obtain leave of court to file any cross-complaint except one filed¿within¿the time¿specified in subdivision (a)¿or¿(b).¿ Leave may be granted in the interest of justice at any time during the course of the action.

“A party who fails to plead a cause of action subject to the requirements of this article, whether through oversight, inadvertence, mistake, neglect, or other cause, may apply to the court for leave to amend his pleading, or to file a cross-complaint, to assert such cause at any time during the course of the action. The court, after notice to the adverse party, shall grant, upon such terms as may be just to the parties, leave to amend the pleading, or to file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith. This subdivision shall be liberally construed to avoid forfeiture of causes of action.” (C.C.P. § 426.50.) (Emphasis added.)

The Court of Appeals has explained: “The legislative mandate is clear. A policy of liberal construction of section 426.50 to avoid forfeiture of causes of action is imposed on the trial¿court. A motion to file a cross-complaint at any time during the course of the action must be granted unless bad faith of the moving party is demonstrated where forfeiture would otherwise result. Factors such as oversight, inadvertence, neglect, mistake or other cause, are insufficient grounds to deny the motion unless accompanied by bad faith.” (Silver Organizations Ltd. v. Frank¿(1990) 217 Cal.App.3d 94, 98–99.) “‘‘Bad faith,’ is defined as ‘[t]he opposite of ‘good faith,’ generally implying or involving actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake . . ., but by some interested or sinister motive[,] . . . not simply bad judgment or negligence, but rather . . . the conscious doing of a wrong because of dishonest purpose or moral obliquity; . . . it contemplates a state of mind affirmatively operating with furtive design or ill will. [Citation.]’ [Citations.]’ [Citation.]” (Id. at 100.)

Analysis

Defendants seek leave of Court to file a Cross-Complaint against Plaintiff to allege causes of action for breach of contract and conversion. Plaintiff in this action claims to be the successor-in-interest to La Salle Bank, N.A. (“La Salle”), which had a previous lending relationship with Defendants which forms the basis of Plaintiff’s claims here. Defendants claim as part of their agreements with La Salle they delivered $1.3 million in stock certificates in Blue Holdings, Inc., which La Salle was to hold as security for a 90-day loan. Defendants claim they performed their obligations under the 90-day loan, but La Salle never returned the certificates. Defendants seek to recover the value of these stock certificates from Plaintiff as La Salle’s successor-in-interest.

Plaintiff argues Defendants claims are time-barred. Defendants’ proposed Cross-Complaint alleges they formed a contract for the 90-day loan with La Salle in “late 2007/early 2008” and states the stock certificates become due for return to them upon performance of their obligations on June 27, 2008. (Ex. A to Bowse Decl. at ¶¶9, 18.) Plaintiff argues under Code Civ. Proc. §§ 338(c)(1) and 337(a), Defendants’ causes of action for conversion and breach of contract are subject to a statute of limitations of three years and four years, respectively. Thus, Plaintiff claim, the statute of limitations expired on Defendant’s proposed cross-claims by 2012 at the latest.

Defendants do not seriously dispute their cross-claims are time bared under the applicable statute of limitations and in fact appear to admit such. “Defendants also agree that their proposed cross-claims might be time-barred if asserted in a separate action.” (Reply at 3.) However, Defendants argue they may nonetheless bring these cross-claims against Plaintiff under Code Civ. Proc. § 431.70, which permits a defendant to assert otherwise time barred claims as an offset for recovery sought by a plaintiff. Section 431.70 provides in pertinent part:

Where cross-demands for money have existed between persons at any point in time when neither demand was barred by the statute of limitations, and an action is thereafter commenced by one such person, the other person may assert in the answer the defense of payment in that the two demands are compensated so far as they equal each other, notwithstanding that an independent action asserting the person’s claim would at the time of filing the answer be barred by the statute of limitations. If the cross-demand would otherwise be barred by the statute of limitations, the relief accorded under this section shall not exceed the value of the relief granted to the other party.

Section 431.70 cannot save Defendants’ proposed Cross-Complaint. First, by its express terms, section 431.70 permits a defendant to “assert in the answer the defense of” offset. It does not authorize the filing of a cross-complaint to assert such claims. Further, where, as here, the claims being raised as an offset “would otherwise be barred by the statute of limitations,” the relief afforded by section 431.70 cannot exceed the relief granted to the plaintiff. In other words, to the extent Defendants are entitled to rely on section 431.70, they can at most only negate Plaintiff’s relief against them and cannot obtain affirmative relief in their favor. Yet, Defendants’ proposed Cross-Complaint seeks relief beyond any offset of Plaintiff’s claims, including monetary and punitive damages.

As the California Supreme Court has explained:

We think the best reading of section 431.70 is that a setoff claim may only be used defensively, being in nature a defensive pleading asserting that the claim constituted prior payment for the amount sought in the plaintiff’s complaint. Indeed, section 431.70 expressly refers to the setoff claim as “the defense of payment,” and partial payment of Jones’s judgment was the logic of our holding in Jones. (Jones, supra, 28 Cal. 2d at p. 633.) One who has paid a liability in full or in part can allege that payment as a defense to a cause of action, but in that case the defendant merely hopes to defeat the plaintiff’s complaint. If, in addition, the defendant seeks affirmative relief in its favor (such as the recovery of damages), it must file a cross-complaint, because section 431.30, subdivision (c), bars it from claiming affirmative relief by way of the answer. (See Estate of Bell (1914) 168 Cal. 253, 258 [141 P. 1179].) Furthermore, to the extent a defendant seeks affirmative relief, the applicable statute of limitations applies to the defendant’s claim, just as it would if the defendant were asserting its claim in an independent action. Therefore, when the Legislature limited the relief available under section 431.70, but only where “the cross-demand would otherwise be barred by the statute of limitations,” it was not eliminating the requirement of filing a cross-complaint to obtain affirmative relief; rather, it was merely confirming the possibility of full relief where the statute of limitations imposes no bar.

(Construction Protective Services, Inc. v. TIG Specialty Ins. Co. (2002) 29 Cal.4th 189, 197-198.)

Under Construction Protective Services, where a defendant’s claims are time-barred, the defendant is limited to pleading the affirmative defense of offset in an answer to the plaintiff’s complaint and cannot seek affirmative relief based on those claims by way of cross-complaint. Defendants Answer in this action, filed on June 10, 2022, asserts an affirmative defense for offset, and thus Defendants are already able to assert entitlement to an offset pursuant to section 431.70. (Answer at 3.) Thus, Defendants’ proposed Cross-Complaint is only necessary or proper if (1) Defendants seek affirmative relief beyond an offset under section 431.70 and (2) their claims are not barred by their respective statutes of limitation. As set forth above, those claims appear to be barred by those statutes on their face as they arise from La Salle’s purported failure to return property to Defendants in 2008. Defendants have offered no basis for relief from the applicable statutes of limitation, and indeed appear to recognize these claims are in fact time barred.

To the extent Defendants seek leave of Court to file a Cross-Complaint to assert an offset against Plaintiff’s recovery under Code Civ. Proc. § 431.70, Defendants’ motion is DENIED as moot as Defendants have already asserted the right to such offset in their Answer. To the extent Defendants seek leave of Court to file a Cross-Complaint to assert claims for affirmative relief against Plaintiff in excess of an offset negating Plaintiff’s recovery, their motion is DENIED as Plaintiff’s have failed to demonstrate such claims are not time barred under Code Civ. Proc. §§ 338(c)(1) and 337(a).

Conclusion

Defendants’ motion for leave to file a Cross-Complaint is DENIED.